There is a lot written about negative equity mortgages, what nobody seems to cover is how they actually work or get underwritten so here is a primer on it, usual caveats apply, this isn’t set it stone, it’s the rules of thumb that will ensure your application is possible with the greatest number of banks.
Naturally the banks don’t release this information, they want it to be a ‘case by case’ product, but we have spotted the trend in terms of how they are assessed which inspired this post.
First the bad news, if you are in negative equity and want to move house you’ll need to have a deposit. Even though you might be ramping up to 175% LTV you can’t do this without a deposit on the 2nd property (that you’ll be moving into).
You’ll also need to ensure you don’t go outside of the maximum LTV allowable in the institution you are applying through.
The easiest way to figure out if your application will work or not is to do the following (other than having a deposit), multiply joint income by about 5.5 and then minus your existing mortgage and the remainder is what you can borrow.
Usual T&C’s apply, banks will reduce this figure if you have children, if you have existing loans or any other ongoing commitments and some will do less than this, but in general you can go to about 5.5 times joint income.
So as an example, we’ll take a couple with no children, they are €100,000 in negative equity on their current home valued at €145,000. They have €30,000 saved up and want to buy a new place, each earns €45,000.
Take the €45,000 as €90,000 (join income) and times 5.5 gives you €495,000. Less their current borrowings of €245,000 (the 145k property is 100k under) and you get €251,000. To complete this deal they’d need at least 10% which they have, but the limitation in terms of price would be around the €260k mark because they’d have to have a deposit, and closing costs. Hope that helps explain it!